Wilmar International - UOB Kay Hian 2015-09-15: Focusing On Core Businesses.

WILMAR INTERNATIONAL LIMITED F34.SI 

Focusing On Core Businesses 

  • Shares are oversold on concern of Wilmar losing its net interest income advantage as interest cost normalises. The narrowing interest rate spread is well within expectation and Wilmar has reduced this exposure. 
  • Core businesses have been performing well with improving refining and crushing margins, consumer pack has exhibited volume growth and sugar is back in profit. 
  • Short selling volume hit 50% of total traded volume while the aggressive buyback was done at 0.8x P/B only. 
  • Maintain BUY. Target price: S$3.60. 


WHAT’S NEW 


 Wilmar’s share price has weakened over the last three weeks by 12% on the concern of lower interest income due to interest cost normalisation. 

  • In the past two years, Wilmar has taken the advantage of lower cost of US dollar borrowings and placed US dollardeposits in the China onshore market to enjoy the positive interest rate spread. 

 Selldown largely done by short sellers. 

  • The short interest in Wilmar was as high as 50% of total volume last week, which sent share price down to a new low since 2009 (refer to line chart next page). This situation will reverse as we are expecting good 2H15 results. The aggressive share buyback (58.76m shares or 0.919% of issued shares) shows that Wilmar is undervalued at only 0.8x 2014 P/B, which is supported by its good plantation assets (238,600ha in planted areas) and prime landbanks located mainly at the major ports of each of the countries it operates in for its downstream operations. 

 Focusing on core businesses which are doing well. 

  • Wilmar’s mid- and downstream operations, which are far larger than its upstream operations, are benefitting from the lower feedstock prices. Palm refining margins will be better in 3Q15 (post implementation of Indonesia exports levy) and soybean crushing margin is improving (better soybean meal price vs declining soybean prices), while expansion into more consumer products will bring down the average operating cost. Sugar should deliver positive earnings this year as sales for its milling volume had been largely locked in earlier at prices higher than current market prices. 

 Impact will fade off in next 12-18 months. 

  • Wilmar has reduced its exposure to take advantage of the interest rate gap as there is global anticipation of the interest rate spread narrowing with the US expected to raise its interest rate. The US$ fixed deposits in China are spread over different maturity periods over the next 12-18 months. Thus, the significant drop in interest income will not happen over 1-2 quarters. For the last three years, total interest income was 26%, 29% and 39% of 2012/13/14 PBT respectively and positive net interest income for 2014 was US$77.4m (5% PBT) and US$17.9m for 1H15 (4% PBT). 

STOCK IMPACT 


 New growth: Africa, sugar and consumer pack businesses are three key areas to watch for growth. 

  • Africa: Wilmar has invested at least US$800m in Africa over the last 15 years. To date, Wilmar has presence in 13 countries with more than 4,000 employees and 59,000 ha of oil palm planted areas (it has the largest Africa plantation exposure among peers). These investments have translated into strong revenue growth of 29% over the last five years (4.7% of total revenue). Today, it is the largest supplier of edible oils in Africa. 
  • Sugar: Sugar’s contribution also grew to 8.7% of total PBT since the takeover of Sucrogen in 2010, and Wilmar’s sugar trade volume of 7m mt for 2014 was about 12% of global sugar trade. This is a significant market share given Wilmar has only entered the sugar market for five years. 
  • Consumer pack: Consumer pack sales volume (5-year CGAR: +12%) and margins both expanded over the last three years on lower feedstock prices and more products utilising the same logistics and distributions networks. 

 Integration model to deliver better margins. 

  • The recent margins stability and small improvement in Palm refining and its China Oilseeds & Grains is attributable to its complete vertical integration model that resulted in cost synergies and economies of scale. For example, Wilmar’s palm oil downstream operation does not simply carry out plain vanilla palm oil refining - its operations extend into higher value-added olechemical and specialty fats segments. 
  • This integration mitigated the volatile and thin palm refining margins that most pure refiners suffered. 

 Recent major expansion mainly via JV and strategic tie-up, 

  • and this was done with the local top player in order to gain immediate access into new growth markets or products. In the past, capex was mainly spent on oil palm planting and palm and soybean mid and downstream expansion in Indonesia and China. 
  • However, over the last three years, expansion was mainly done through tie-ups with strategic partners, such as the takeover of Goodman Fielder together with First Pacific, equity stakes in Shree Renuka for India and Brazil sugar exposure as well as the formation of the JV with Great Wall Food Stuff in Myanmar to produce and sell sugar and its by-products. 

EARNINGS REVISION/RISK 

  • We maintain our forecasts, which assume 9.5% 3-year net profit CAGR (2014-17). We are expecting the growth to be driven by its downstream operations in Palm and Soybean. 

VALUATION/RECOMMENDATION 

  • Maintain BUY at SOTP-based target price of S$3.60. 
  • Our key assumptions include 15x PE for its palm upstream, consumer pack and sugar divisions 13x for its palm refining and soybean crushing and 10x for the rest of operations. 
  • Our target price translates into a blended PE of 12x 2015F PE and 11x 2016F PE. 

SHARE PRICE CATALYST 

  • Consolidation of soybean crushers could lead to better margins. 
  • Weather-induced commodities price hike. 
  • Full implementation of the biodiesel mandates globally could lead to better demand for biodiesel. Wilmar is the world largest palm biodiesel producers.


Singapore Research Team | http://research.uobkayhian.com/ UOB KH 2015-09-15
BUY Maintain BUY 3.60 Same 3.60


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